Misplaced Pages

#16983

112-437: In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage , it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of

224-513: A corporate bond with a stock call option attached to it. The price of a convertible bond is sensitive to three major factors: Given the complexity of the calculations involved and the convoluted structure that a convertible bond can have, an arbitrageur often relies on sophisticated quantitative models in order to identify bonds that are trading cheap versus their theoretical value. Statistical arbitrage In finance , statistical arbitrage (often abbreviated as Stat Arb or StatArb )

336-399: A single asset or identical cash-flows; in common use, it is also used to refer to differences between similar assets ( relative value or convergence trades ), as in merger arbitrage . The term is mainly applied in the financial field. People who engage in arbitrage are called arbitrageurs ( / ˌ ɑːr b ɪ t r ɑː ˈ ʒ ɜːr / ). Arbitrage has the effect of causing prices of

448-537: A Roman merchant named Lun reached southern China in 226 CE. Archaeologists have recovered Roman objects dating from the period 27 BCE to 37 CE from excavation sites as far afield as the Kushan and Indus ports. The Romans sold purple and yellow dyes, brass and iron; they acquired incense , balsam , expensive liquid myrrh and spices from the Near East and India, fine silk from China and fine white marble destined for

560-407: A bond, a yield curve of similar zero-coupon bonds with different maturities is created. If the curve were to be created with Treasury securities of different maturities, they would be stripped of their coupon payments through bootstrapping. This is to transform the bonds into zero-coupon bonds. The yield of these zero-coupon bonds would then be plotted on a diagram with time on the x -axis and yield on

672-598: A book called Merchants in Motion: the art of Vietnamese Street Vendors. Although merchant halls were known in antiquity, they fell into disuse and were not reinvented until Europe's Medieval period. During the 12th century, powerful guilds which controlled the way that trade was conducted were established and were often incorporated into the charters granted to market towns . By the 13th and 14th centuries, merchant guilds had acquired sufficient resources to erect guild halls in many major market towns. Many buildings have retained

784-667: A car purchased in the United States is cheaper than the same car in Canada. Canadians would buy their cars across the border to exploit the arbitrage condition. At the same time, Americans would buy US cars, transport them across the border, then sell them in Canada. Canadians would have to buy American dollars to buy the cars and Americans would have to sell the Canadian dollars they received in exchange. Both actions would increase demand for US dollars and supply of Canadian dollars. As

896-441: A contrarian mean reversion principle but can also be designed using such factors as lead/lag effects, corporate activity, short-term momentum , etc. This is usually referred to as a multi-factor approach to StatArb. Because of the large number of stocks involved, the high portfolio turnover and the fairly small size of the effects one is trying to capture, the strategy is often implemented in an automated fashion and great attention

1008-691: A diverse range of product types. These merchants were concentrated in the larger cities. They often provided high levels of credit financing for retail transactions. In the nineteenth century, merchants and merchant houses played a role in opening up China and the Pacific to Anglo-American trade interests. Note for example Jardine Matheson & Co. and the merchants of New South Wales . Other merchants profited from natural resources (the Hudson's Bay Company theoretically controlled much of North America, names like Rockefeller and Nobel dominated trade in oil in

1120-617: A financial crisis, often termed a " flight to quality "; these are precisely the times when it is hardest for leveraged investors to raise capital (due to overall capital constraints), and thus they will lack capital precisely when they need it most. Grey market arbitrage is the sale of goods purchased through informal channels to earn the difference in price. Excessive gray market arbitrage will lead to arbitrage behaviors in formal channels, which will reduce returns due to factors such as price confusion, and may even cause prices to plummet in severe cases. Also known as geographical arbitrage , this

1232-406: A finite period of time, a low probability market movement may impose heavy short-term losses. If such short-term losses are greater than the investor's funding to meet interim margin calls, its positions may need to be liquidated at a loss even when its strategy's modeled forecasts ultimately turn out to be correct. The 1998 default of Long-Term Capital Management was a widely publicized example of

SECTION 10

#1732776611017

1344-444: A fund that failed due to its inability to post collateral to cover adverse market fluctuations. Statistical arbitrage is also subject to model weakness as well as stock- or security-specific risk. The statistical relationship on which the model is based may be spurious, or may break down due to changes in the distribution of returns on the underlying assets. Factors, which the model may not be aware of having exposure to, could become

1456-691: A group of musical performers; and dream merchant , which refers to someone who peddles idealistic visionary scenarios. Broadly, merchants can be classified into two categories: However, the term 'merchant' is often used in a variety of specialised contexts such as in merchant banker , merchant navy or merchant services . Merchants have existed as long as humans have conducted business, trade or commerce. A merchant class operated in many pre-modern societies . Open-air, public markets, where merchants and traders congregated, functioned in ancient Babylonia and Assyria, China, Egypt, Greece, India, Persia, Phoenicia and Rome. These markets typically occupied

1568-530: A large loss as they can capture a higher after-tax yield by offsetting the taxable corporate income with underwriting losses). There are additional inefficiencies arising from the highly fragmented nature of the municipal bond market which has two million outstanding issues and 50,000 issuers, in contrast to the Treasury market which has 400 issues and a single issuer. Second, managers construct leveraged portfolios of AAA- or AA-rated tax-exempt municipal bonds with

1680-552: A lowly profession and it was often subject to legal discrimination or restrictions, although in a few areas its status began to improve. The modern era is generally understood to refer to period that started with the rise of consumer culture in seventeenth- and eighteenth-century Europe. As standards of living improved in the 17th century, consumers from a broad range of social backgrounds began to purchase goods that were in excess of basic necessities. An emergent middle class or bourgeoisie stimulated demand for luxury goods, and

1792-578: A number of former Phoenician cities and colonies around the Mediterranean, such as Byblos (in present-day Lebanon ) and Carthage in North Africa. The social status of the merchant class varied across cultures; ranging from high status (the members even eventually achieving titles such as that of Merchant Prince or Nabob ) to low status, as in China , Greece and Roman cultures, owing to

1904-428: A place in the town's centre. Surrounding the market, skilled artisans, such as metal-workers and leather workers, occupied premises in alley ways that led to the open market-place. These artisans may have sold wares directly from their premises, but also prepared goods for sale on market days. In ancient Greece markets operated within the agora (open space), and in ancient Rome in the forum . Rome's forums included

2016-586: A result, there would be an appreciation of the US currency. This would make US cars more expensive and Canadian cars less so until their prices were similar. On a larger scale, international arbitrage opportunities in commodities, goods, securities , and currencies tend to change exchange rates until the purchasing power is equal. In reality, most assets exhibit some difference between countries. These, transaction costs , taxes, and other costs provide an impediment to this kind of arbitrage. Similarly, arbitrage affects

2128-546: A short term mean reversion principle so that, e.g., stocks that have done unusually well in the past week receive low scores and stocks that have underperformed receive high scores. In the second or "risk reduction" phase, the stocks are combined into a portfolio in carefully matched proportions so as to eliminate, or at least greatly reduce, market and factor risk. This phase often uses commercially available risk models like MSCI/Barra , APT, Northfield, Risk Infotech, and Axioma to constrain or eliminate various risk factors. Over

2240-453: A small amount closer (but often no closer than 0), while they can get very far apart. The day-to-day risks are generally small because the transactions involve small differences in price, so an execution failure will generally cause a small loss (unless the trade is very big or the price moves rapidly). The rare case risks are extremely high because these small price differences are converted to large profits via leverage (borrowed money), and in

2352-483: A system of agents. Merchants specialised in financing, organisation and transport while agents were domiciled overseas and acted on behalf of a principal. These arrangements first appeared on the route from Italy to the Levant, but by the end of the thirteenth century merchant colonies could be found from Paris, London, Bruges, Seville, Barcelona and Montpellier. Over time these partnerships became more commonplace and led to

SECTION 20

#1732776611017

2464-549: Is a class of short-term financial trading strategies that employ mean reversion models involving broadly diversified portfolios of securities (hundreds to thousands) held for short periods of time (generally seconds to days). These strategies are supported by substantial mathematical, computational, and trading platforms. Broadly speaking, StatArb is actually any strategy that is bottom-up, beta -neutral in approach and uses statistical/econometric techniques in order to provide signals for execution. Signals are often generated through

2576-458: Is a measure of market efficiency. Arbitrage tends to reduce price discrimination by encouraging people to buy an item where the price is low and resell it where the price is high (as long as the buyers are not prohibited from reselling and the transaction costs of buying, holding, and reselling are small, relative to the difference in prices in the different markets). Arbitrage moves different currencies toward purchasing power parity . Assume that

2688-403: Is a precondition for a general economic equilibrium . The "no arbitrage" assumption is used in quantitative finance to calculate a unique risk neutral price for derivatives . Arbitrage-free pricing for bonds is the method of valuing a coupon-bearing financial instrument by discounting its future cash flows by multiple discount rates. By doing so, a more accurate price can be obtained than if

2800-403: Is automated and consists of two phases. In the first or "scoring" phase, each stock in the market is assigned a numeric score or rank that reflects its desirability; high scores indicate stocks that should be held long and low scores indicate stocks that are candidates for shorting. The details of the scoring formula vary and are highly proprietary, but, generally (as in pairs trading), they involve

2912-447: Is believed to be the first example of a merchant guild. The term, guild was first used for gilda mercatoria and referred to body of merchants operating out of St. Omer, France in the 11th century. Similarly, London's Hanse was formed in the 12th century. These guilds controlled the way that trade was to be conducted and codified rules governing the conditions of trade. Rules established by merchant guilds were often incorporated into

3024-404: Is difficult to explain unless there was a common risk factor. While the reasons are not yet fully understood, several published accounts blame the emergency liquidation of a fund that experienced capital withdrawals or margin calls . By closing out its positions quickly, the fund put pressure on the prices of the stocks it was long and short. Because other StatArb funds had similar positions, due to

3136-430: Is generally possible only with securities and financial products that can be traded electronically, and even then, when each leg of the trade is executed, the prices in the market may have moved. Missing one of the legs of the trade (and subsequently having to trade it soon after at a worse price) is called 'execution risk' or more specifically 'leg risk'. In the simplest example, any good sold in one market should sell for

3248-587: Is itself a risk factor, one that is relatively new and thus was not taken into account by the StatArb models. These events showed that StatArb has developed to a point where it is a significant factor in the marketplace, that existing funds have similar positions and are in effect competing for the same returns. Simulations of simple StatArb strategies by Khandani and Lo show that the returns to such strategies have been reduced considerably from 1998 to 2007, presumably because of competition. It has also been argued that

3360-414: Is necessary. On a stock-specific level, there is risk of M&A activity or even default for an individual name. Such an event would immediately invalidate the significance of any historical relationship assumed from empirical statistical analysis of the past data. During July and August 2007, a number of StatArb (and other Quant type) hedge funds experienced significant losses at the same time, which

3472-445: Is not necessarily indicative of dependence. As more competitors enter the market, and funds diversify their trades across more platforms than StatArb, a point can be made that there should be no reason to expect the platform models to behave anything like each other. Their statistical models could be entirely independent. Statistical arbitrage faces different regulatory situations in different countries or markets. In many countries where

Arbitrage - Misplaced Pages Continue

3584-458: Is often referred to as limits to arbitrage . Generally, it is impossible to close two or three transactions at the same instant; therefore, there is the possibility that when one part of the deal is closed, a quick shift in prices makes it impossible to close the other at a profitable price. However, this is not necessarily the case. Many exchanges and inter-dealer brokers allow multi legged trades (e.g. basis block trades on LIFFE). Competition in

3696-415: Is placed on reducing trading costs. Statistical arbitrage has become a major force at both hedge funds and investment banks. Many bank proprietary operations now center to varying degrees around statistical arbitrage trading. As a trading strategy, statistical arbitrage is a heavily quantitative and computational approach to securities trading. It involves data mining and statistical methods, as well as

3808-475: Is that such a spread will eventually be zero, if and when the takeover is completed. The risk is that the deal "breaks" and the spread massively widens. Also called municipal bond relative value arbitrage , municipal arbitrage , or just muni arb , this hedge fund strategy involves one of two approaches. The term "arbitrage" is also used in the context of the Income Tax Regulations governing

3920-543: Is the simplest form of arbitrage. In spatial arbitrage, an arbitrageur looks for price differences between geographically separate markets. For example, there may be a bond dealer in Virginia offering a bond at 100-12/23 and a dealer in Washington bidding 100-15/23 for the same bond. For whatever reason, the two dealers have not spotted the difference in the prices, but the arbitrageur does. The arbitrageur immediately buys

4032-415: Is used to magnify the reward through leverage. One way of reducing this risk is through the illegal use of inside information , and risk arbitrage in leveraged buyouts was associated with some of the famous financial scandals of the 1980s, such as those involving Michael Milken and Ivan Boesky . Another risk occurs if the items being bought and sold are not identical and the arbitrage is conducted under

4144-823: The Forum Romanum , the Forum Boarium and Trajan's Forum . The Forum Boarium, one of a series of fora venalia or food markets, originated, as its name suggests, as a cattle market. Trajan's Forum was a vast expanse, comprising multiple buildings with shops on four levels. The Roman forum was arguably the earliest example of a permanent retail shop-front. In antiquity, exchange involved direct selling through permanent or semi-permanent retail premises such as stall-holders at market places or shop-keepers selling from their own premises or through door-to-door direct sales via merchants or peddlers . The nature of direct selling centred around transactional exchange, where

4256-546: The Mediterranean , becoming a major trading power by the 9th century BCE. Phoenician merchant traders imported and exported wood, textiles, glass and produce such as wine, oil, dried fruit and nuts. Their trading necessitated a network of colonies along the Mediterranean coast, stretching from modern-day Crete through to Tangiers (in present-day Morocco ) and northward to Sardinia . The Phoenicians not only traded in tangible goods, but were also instrumental in transporting

4368-402: The y -axis. Since the yield curve displays market expectations on how yields and interest rates may move, the arbitrage-free pricing approach is more realistic than using only one discount rate. Investors can use this approach to value bonds and find price mismatches, resulting in an arbitrage opportunity. If a bond valued with the arbitrage-free pricing approach turns out to be priced higher in

4480-591: The 1530s. These included including Georg Giese of Danzig ; Hillebrant Wedigh of Cologne ; Dirk Tybis of Duisburg ; Hans of Antwerp , Hermann Wedigh, Johann Schwarzwald, Cyriacus Kale, Derich Born and Derick Berck. Paintings of groups of merchants, notably officers of the merchant guilds, also became subject matter for artists and documented the rise of important mercantile organisations. In 2022, Dutch photographer Loes Heerink spend hours on bridges in Hanoi to take pictures of Vietnamese street Merchants. She published

4592-537: The 17th century. They stood out in international trade due to their vast network – mostly built by Armenian migrants spread across Eurasia. Armenians had established prominent trade-relations with all big export players such as India, China, Persia, the Ottoman Empire, England, Venice, the Levant, etc. Soon they captured Eastern and Western Europe, Russia, the Levant, the Middle East, Central Asia, India, and

Arbitrage - Misplaced Pages Continue

4704-477: The 18th century with governmental encouragement of nobles to invest in trade, and the lifting of old bans on nobles engaging in economic activities. As Britain continued colonial expansion , large commercial organisations came to provide a market for more sophisticated information about trading conditions in foreign lands. Daniel Defoe ( c. 1660–1731), a London merchant, published information on trade and economic resources of England, Scotland and India. Defoe

4816-469: The 21st century. Elizabeth Honig has argued that artists, especially the painters of Antwerp , developed a fascination with merchants from the mid-16th century. The wealthier merchants also had the means to commission artworks with the result that individual merchants and their families became important subject matter for artists. For instance, Hans Holbein the younger painted a series of portraits of Hanseatic merchants working out of London's Steelyard in

4928-467: The European medieval period , a rapid expansion in trade and commerce led to the rise of a wealthy and powerful merchant class . The European Age of Discovery opened up new trading routes and gave European consumers access to a much broader range of goods. By the 18th century, a new type of manufacturer-merchant had started to emerge and modern business practices were becoming evident. The status of

5040-548: The Far East trade routes, carrying out mostly caravan -trade activities. A significant reason for Armenians' massive involvement in international trade was their geographic location – the Armenian lands stand at the crossroads between Asia and Europe. Another reason was their religion, as they were a Christian nation isolated between Muslim Iran and Muslim Turkey. European Christians preferred to carry out trade with Christians in

5152-509: The Mediterranean; its fame travelled as far away as modern southern France. Other notable Roman merchants included Marcus Julius Alexander (16 – 44 CE), Sergius Orata (fl. c. 95 BCE) and Annius Plocamus (1st century CE). In the Roman world, local merchants served the needs of the wealthier landowners. While the local peasantry, who were generally poor, relied on open-air market places to buy and sell produce and wares, major producers such as

5264-632: The Middle English, marchant , which is derived from Anglo-Norman marchaunt , which itself originated from the Vulgar Latin mercatant or mercatans , formed from present participle of mercatare ('to trade, to traffic or to deal in'). The term refers to any type of reseller, but can also be used with a specific qualifier to suggest a person who deals in a given characteristic such as speed merchant , which refer to someone who enjoys fast driving; noise merchant , which refers to

5376-469: The Roman wholesale market from Arabia. For Roman consumers, the purchase of goods from the East was a symbol of social prestige . Medieval England and Europe witnessed a rapid expansion in trade and the rise of a wealthy and powerful merchant class. Blintiff has investigated the early Medieval networks of market towns and suggests that by the 12th century there was an upsurge in the number of market towns and

5488-509: The Romans did not consider the activities of merchants "respectable". In the ancient cities of the Middle East, where the bazaar was the city's focal point and heartbeat, merchants who worked in bazaar enjoyed high social status and formed part of local elites. In Medieval Western Europe, the Christian church, which closely associated merchants' activities with the sin of usury , criticised

5600-533: The US and in the Russian Empire), while still others made fortunes from exploiting new inventions – selling space on and commodities carried by railways and steamships. In fully planned economies of the 20th century, planners replaced merchants in organising the distribution of goods and services . However, merchants, increasingly labelled with euphemisms such as "industrialists", "businessmen", "entrepreneurs" or "oligarchs" , continue their activities in

5712-404: The act of shopping came to be seen as a pleasurable pastime or form of entertainment. 16th century Spanish and 17th century English nobles had been enticed into participating in trade by the profitability of colonial expeditions. In the 17th century, members of the nobility in many European countries like France or Spain still disliked engaging in merchant activities, but such attitudes changed in

SECTION 50

#1732776611017

5824-409: The assumption that the prices of the items are correlated or predictable; this is more narrowly referred to as a convergence trade . In the extreme case this is merger arbitrage, described below. In comparison to the classical quick arbitrage transaction, such an operation can produce disastrous losses. As arbitrages generally involve future movements of cash, they are subject to counterparty risk :

5936-522: The bond from the Virginia dealer and sells it to the Washington dealer. Also known as interexchange arbitrage, this is the form of arbitrage that takes advantage of the difference between two or more crypto exchanges. For example, on HTX token like LSK could be priced at $ 1.39 while on Gate it could be sold for $ 1.5. Although there are some risks involved in that type of arbitrage, such as network and exchange fees, blockchain overload, and inability to deposit or withdraw funds, this activity remains one of

6048-436: The bonds in t 1 move closer together to finally become the same at t T . Arbitrage may take place when: Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change in one market before both transactions are complete. In practical terms, this

6160-604: The charters granted to market towns . In the early 12th century, a confederation of merchant guilds, formed out the German cities of Lübeck and Hamburg, known as "The Hanseatic League " came to dominate trade around the Baltic Sea . By the 13th and 14th centuries, merchant guilds had sufficient resources to have erected guild halls in many major market towns. During the thirteenth century, European businesses became more permanent and were able to maintain sedentary merchants and

6272-472: The current price, if the merger goes through as predicted. Traditionally, arbitrage transactions in the securities markets involve high speed, high volume, and low risk. At some moment a price difference exists, and the problem is to execute two or three balancing transactions while the difference persists (that is, before the other arbitrageurs act). When the transaction involves a delay of weeks or months, as above, it may entail considerable risk if borrowed money

6384-402: The development of large trading companies. These developments also triggered innovations such as double-entry book-keeping, commercial accountancy, international banking including access to lines of credit, marine insurance and commercial courier services. These developments are sometimes known as the commercial revolution. Luca Clerici has made a detailed study of Vicenza's food market during

6496-474: The difference between the bond spread and the CDS premium, in a financial crisis, the bonds may default and the CDS writer/seller may fail, due to the stress of the crisis, causing the arbitrageur to face steep losses. Arbitrage trades are necessarily synthetic, leveraged trades, as they involve a short position. If the assets used are not identical (so a price divergence makes the trade temporarily lose money), or

6608-471: The difference in interest rates paid on government bonds issued by the various countries, given the expected depreciation in the currencies relative to each other (see interest rate parity ). Arbitrage transactions in modern securities markets involve fairly low day-to-day risks, but can face extremely high risk in rare situations, particularly financial crises , and can lead to bankruptcy . Formally, arbitrage transactions have negative skew – prices can get

6720-446: The discount rate may differ for each cash flow. Each cash flow can be considered a zero-coupon instrument that pays one payment upon maturity. The discount rates used should be the rates of multiple zero-coupon bonds with maturity dates the same as each cash flow and similar risk as the instrument being valued. By using multiple discount rates, the arbitrage-free price is the sum of the discounted cash flows . Arbitrage-free price refers to

6832-411: The duration risk hedged by shorting the appropriate ratio of taxable corporate bonds. These corporate equivalents are typically interest rate swaps referencing Libor or SIFMA . The arbitrage manifests itself in the form of a relatively cheap longer maturity municipal bond, which is a municipal bond that yields significantly more than 65% of a corresponding taxable corporate bond. The steeper slope of

SECTION 60

#1732776611017

6944-747: The eighteenth century, a new type of manufacturer-merchant was emerging and modern business practices were becoming evident. Many merchants held showcases of goods in their private homes for the benefit of wealthier clients. Samuel Pepys , for example, writing in 1660, describes being invited to the home of a retailer to view a wooden jack. McKendrick, Brewer and Plumb found extensive evidence of eighteenth-century English entrepreneurs and merchants using "modern" marketing techniques, including product differentiation , sales promotion and loss-leader pricing. English industrialists, Josiah Wedgewood (1730–1795) and Matthew Boulton (1728–1809), are often portrayed as pioneers of modern mass-marketing methods. Wedgewood

7056-460: The emergence of merchant circuits as traders bulked up surpluses from smaller regional, different day markets and resold them at the larger centralised market towns. Peddlers or itinerant merchants filled any gaps in the distribution system. From the 11th century, the Crusades helped to open up new trade routes in the Near East, while the adventurer and merchant, Marco Polo stimulated interest in

7168-529: The events during August 2007 were linked to reduction of liquidity, possibly due to risk reduction by high-frequency market makers during that time. It is a noteworthy point of contention, that the common reduction in portfolio value could also be attributed to a causal mechanism. The 2007-2008 financial crisis also occurred at this time. Many, if not the vast majority, of investors of any form, booked losses during this one year time frame. The association of observed losses at hedge funds using statistical arbitrage

7280-474: The failure of the other participant in a substantial transaction, or a series of transactions, to fulfill their financial obligations. Liquidity risk, conversely, emerges when an entity is necessitated to allocate additional monetary resources as margin, but encounters a deficit in the required capital. In the academic literature, the idea that seemingly very low-risk arbitrage trades might not be fully exploited because of these risk factors and other considerations

7392-575: The far East in the 13th century. Medieval merchants began to trade in exotic goods imported from distant shores including spices, wine, food, furs, fine cloth (notably silk), glass, jewellery and many other luxury goods . Market towns began to spread across the landscape during the medieval period. Merchant guilds began to form during the Medieval period. A fraternity formed by the merchants of Tiel in Gelderland (in present-day Netherlands) in 1020

7504-526: The fine cloth imports while the Hanseatic League controlled most of the trade in the Baltic Sea. A detailed study of European trade between the thirteenth and fifteenth century demonstrates that the European age of discovery acted as a major driver of change. In 1600, goods travelled relatively short distances: grain 5–10 miles; cattle 40–70 miles; wool and wollen cloth 20–40 miles. However, in

7616-412: The floor of his atrium were decorated with images of amphorae bearing his personal brand and inscribed with quality claims. One of the inscriptions on the mosaic amphora reads "G(ari) F(los) SCO[m]/ SCAURI/ EX OFFI[ci]/NA SCAU/RI" which translates as "The flower of garum, made of the mackerel, a product of Scaurus, from the shop of Scaurus". Scaurus' fish sauce had a reputation for very high quality across

7728-439: The goods were on open display, allowing buyers to evaluate quality directly through visual inspection. Relationships between merchant and consumer were minimal often playing into public concerns about the quality of produce. The Phoenicians became well known amongst contemporaries as "traders in purple" – a reference to their monopoly over the purple dye extracted from the murex shell. The Phoenicians plied their ships across

7840-505: The great estates were sufficiently attractive for merchants to call directly at their farm-gates. The very wealthy landowners managed their own distribution, which may have involved exporting. Markets were also important centres of social life, and merchants helped to spread news and gossip. The nature of export markets in antiquity is well documented in ancient sources and in archaeological case-studies. Both Greek and Roman merchants engaged in long-distance trade. A Chinese text records that

7952-515: The highest level of exchange, they transferred a more outward-looking mindset and system of values to their commercial-exchange transactions, and also helped to disseminate a more global awareness to broader society and therefore acted as agents of change for local society. Successful, open-minded cosmopolitan merchants began to acquire a more esteemed social position within the political elites. They were often sought as advisors for high-level political agents. The English nabobs belong to this era. By

8064-409: The inefficiency is related to government tax policy, and hence is structural in nature, it has not been arbitraged away. However, many municipal bonds are callable, and this adds substantial risks to the strategy. A convertible bond is a bond that an investor can return to the issuing company in exchange for a predetermined number of shares in the company. A convertible bond can be thought of as

8176-494: The investment of proceeds of municipal bonds; these regulations, aimed at the issuers or beneficiaries of tax-exempt municipal bonds, are different and, instead, attempt to remove the issuer's ability to arbitrage between the low tax-exempt rate and a taxable investment rate. Generally, managers seek relative value opportunities by being both long and short municipal bonds with a duration-neutral book. The relative value trades may be between different issuers, different bonds issued by

8288-435: The margin treatment is not identical, and the trader is accordingly required to post margin (faces a margin call ), the trader may run out of capital (if they run out of cash and cannot borrow more) and be forced to sell these assets at a loss even though the trades may be expected to ultimately make money. In effect, arbitrage traders synthesise a put option on their ability to finance themselves. Prices may diverge during

8400-603: The market stabilization mechanisms (e.g. daily limit) set heavy obstacles when either individual investors or institutional investors try to implement the trading strategy implied by statistical arbitrage theory. Merchant A merchant is a person who trades in commodities produced by other people, especially one who trades with foreign countries. Merchants have been known for as long as humans have engaged in trade and commerce. Merchants and merchant networks operated in ancient Babylonia , Assyria , China , Egypt , Greece , India , Persia , Phoenicia and Rome . During

8512-448: The market, an investor could have such an opportunity: If the outcome from the valuation were the reverse case, the opposite positions would be taken in the bonds. This arbitrage opportunity comes from the assumption that the prices of bonds with the same properties will converge upon maturity. This can be explained through market efficiency, which states that arbitrage opportunities will eventually be discovered and corrected. The prices of

8624-575: The marketplace can also create risks during arbitrage transactions. As an example, if one was trying to profit from a price discrepancy between IBM on the NYSE and IBM on the London Stock Exchange, they may purchase a large number of shares on the NYSE and find that they cannot simultaneously sell on the LSE. This leaves the arbitrageur in an unhedged risk position. In the 1980s, risk arbitrage

8736-507: The merchant class, strongly influencing attitudes towards them. In Greco-Roman society, merchants typically did not have high social status, though they may have enjoyed great wealth. Umbricius Scauras, for example, was a manufacturer and trader of garum in Pompeii, circa 35 C.E. His villa, situated in one of the wealthier districts of Pompeii, was very large and ornately decorated in a show of substantial personal wealth. Mosaic patterns in

8848-487: The merchant has varied during different periods of history and among different societies. In modern times, the term merchant has occasionally been used to refer to a businessperson or someone undertaking activities (commercial or industrial) for the purpose of generating profit, cash flow, sales, and revenue using a combination of human, financial, intellectual and physical capital with a view to fueling economic development and growth. The English term, merchant comes from

8960-448: The most profitable places of issuance and settlement for a bill of exchange (" L'arbitrage est une combinaison que l’on fait de plusieurs changes, pour connoitre [ connaître , in modern spelling] quelle place est plus avantageuse pour tirer et remettre ".) If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium , or an arbitrage-free market. An arbitrage equilibrium

9072-519: The most profitable ventures in crypto . For very short amounts of time, the prices of two assets that are either fungible or related by a strict pricing relationship may temporarily go out of sync as the market makers are slow to update the prices. This momentary mispricing creates the opportunity for an arbitrageur to capture the difference between the two prices. For example, the price of calls and puts on an underlying should be related by put-call parity . If these prices are misquoted relative to

9184-495: The municipal yield curve allows participants to collect more after-tax income from the municipal bond portfolio than is spent on the interest rate swap; the carry is greater than the hedge expense. Positive, tax-free carry from muni arb can reach into the double digits. The bet in this municipal bond arbitrage is that, over a longer period of time, two similar instruments—municipal bonds and interest rate swaps—will correlate with each other; they are both very high quality credits, have

9296-634: The nobility. This trading system supported various levels of pochteca – from very high status merchants through to minor traders who acted as a type of peddler to fill in gaps in the distribution system. The Spanish conquerors commented on the impressive nature of the local and regional markets in the 15th century. The Mexica ( Aztec ) market of Tlatelolco was the largest in all the Americas and said to be superior to those in Europe. In much of Renaissance Europe and even after, merchant trade remained seen as

9408-421: The other. See rational pricing , particularly § arbitrage mechanics , for further discussion. Mathematically it is defined as follows: where V 0 = 0 {\displaystyle V_{0}=0} , V t {\displaystyle V_{t}} denotes the portfolio value at time  t and T is the time the portfolio ceases to be available on the market. This means that

9520-421: The present. In the present-value approach, the cash flows are discounted with one discount rate to find the price of the bond. In arbitrage-free pricing, multiple discount rates are used. The present-value approach assumes that the bond yield will stay the same until maturity. This is a simplified model because interest rates may fluctuate in the future, which in turn affects the yield on the bond. For this reason,

9632-401: The presumed distastefulness of profiting from "mere" trade rather than from labor or the labor of others as in agriculture and craftsmanship . The Romans defined merchants or traders in a very narrow sense. Merchants were those who bought and sold goods, while landowners who sold their own produce were not classed as merchants. Being a landowner was a "respectable" occupation. On the other hand,

9744-432: The price at which no price arbitrage is possible. The idea of using multiple discount rates obtained from zero-coupon bonds and discounting a similar bond's cash flow to find its price is derived from the yield curve, which is a curve of the yields of the same bond with different maturities. This curve can be used to view trends in market expectations of how interest rates will move in the future. In arbitrage-free pricing of

9856-440: The price is calculated with a present-value pricing approach. Arbitrage-free pricing is used for bond valuation and to detect arbitrage opportunities for investors. For the purpose of valuing the price of a bond, its cash flows can each be thought of as packets of incremental cash flows with a large packet upon maturity, being the principal. Since the cash flows are dispersed throughout future periods, they must be discounted back to

9968-710: The put-call parity relationship, it provides an arbitrageur the opportunity to profit from the mispricing. Latency arbitrage is often mentioned especially in electronic processing in the financial field, where the use of fast server hardware allows an arbitrageur to realize opportunities that may exist for as little as nanoseconds. A study by the Financial Conduct Authority of the United Kingdom found that this practice generates as much as $ 5 billion per year in profit. Also called risk arbitrage , merger arbitrage generally consists of buying/holding

10080-399: The rare event of a large price move, this may yield a large loss. The principal risk, which is typically encountered on a routine basis, is classified as execution risk. This transpires when an aspect of the financial transaction does not materialize as anticipated. Infrequent, albeit critical, risks encompass counterparty and liquidity risks. The former, counterparty risk, is characterized by

10192-491: The region. Eighteenth-century merchants who traded in foreign markets developed a network of relationships which crossed national boundaries, religious affiliations, family ties, and gender. The historian, Vannneste, has argued that a new " cosmopolitan merchant mentality" based on trust, reciprocity and a culture of communal support developed and helped to unify the early modern world. Given that these cosmopolitan merchants were embedded within their societies and participated in

10304-508: The risk that a counterparty fails to fulfill their side of a transaction. This is a serious problem if one has either a single trade or many related trades with a single counterparty, whose failure thus poses a threat, or in the event of a financial crisis when many counterparties fail. This hazard is serious because of the large quantities one must trade in order to make a profit on small price differences. For example, if one purchases many risky bonds, then hedges them with CDSes , profiting from

10416-424: The sake of the publicity and kudos generated. Both Wedgewood and Boulton staged expansive showcases of their wares in their private residences or in rented halls. Eighteenth-century American merchants, who had been operating as importers and exporters, began to specialise in either wholesale or retail roles. They tended not to specialise in particular types of merchandise, often trading as general merchants, selling

10528-449: The same entity, or capital structure trades referencing the same asset (in the case of revenue bonds). Managers aim to capture the inefficiencies arising from the heavy participation of non-economic investors (i.e., high income " buy and hold " investors seeking tax-exempt income) as well as the "crossover buying" arising from corporations' or individuals' changing income tax situations (i.e., insurers switching their munis for corporates after

10640-408: The same maturity and are denominated in the same currency. Credit risk and duration risk are largely eliminated in this strategy. However, basis risk arises from use of an imperfect hedge, which results in significant, but range-bound principal volatility. The end goal is to limit this principal volatility, eliminating its relevance over time as the high, consistent, tax-free cash flow accumulates. Since

10752-440: The same or very similar assets in different markets to converge. "Arbitrage" is a French word and denotes a decision by an arbitrator or arbitration tribunal (in modern French, " arbitre " usually means referee or umpire ). In the sense used here, it was first defined in 1704 by Mathieu de la Porte in his treatise " La science des négociants et teneurs de livres " as a consideration of different exchange rates to recognise

10864-535: The same price in another. Traders may, for example, find that the price of wheat is lower in agricultural regions than in cities, purchase the good, and transport it to another region to sell at a higher price. This type of price arbitrage is the most common, but this simple example ignores the cost of transport, storage, risk, and other factors. "True" arbitrage requires that there is no market risk involved. Where securities are traded on more than one exchange, arbitrage occurs by simultaneously buying in one and selling on

10976-414: The significant drivers of price action in the markets, and the inverse applies also. The existence of the investment based upon model itself may change the underlying relationship, particularly if enough entrants invest with similar principles. The exploitation of arbitrage opportunities themselves increases the efficiency of the market, thereby reducing the scope for arbitrage, so continual updating of models

11088-428: The similarity of their alpha models and risk-reduction models, the other funds experienced adverse returns. One of the versions of the events describes how Morgan Stanley 's highly successful StatArb fund, PDT , decided to reduce its positions in response to stresses in other parts of the firm, and how this contributed to several days of hectic trading. In a sense, the fact of a stock being heavily involved in StatArb

11200-431: The sixteenth century. He found that there were many different types of merchants operating out of the markets. For example, in the dairy trade, cheese and butter was sold by the members of two craft guilds (i.e., cheesemongers who were shopkeepers) and that of the so-called ‘resellers’ (hucksters selling a wide range of foodstuffs), and by other sellers who were not enrolled in any guild. Cheesemongers’ shops were situated at

11312-417: The stock of a company that is the target of a takeover while shorting the stock of the acquiring company. Usually, the market price of the target company is less than the price offered by the acquiring company. The spread between these two prices depends mainly on the probability and the timing of the takeover being completed as well as the prevailing level of interest rates. The bet in a merger arbitrage

11424-544: The strategy is to find a pair of stocks with high correlation , cointegration , or other common factor characteristics. Various statistical tools have been used in the context of pairs trading ranging from simple distance-based approaches to more complex tools such as cointegration and copula concepts. StatArb considers not pairs of stocks but a portfolio of a hundred or more stocks—some long, some short—that are carefully matched by sector and region to eliminate exposure to beta and other risk factors. Portfolio construction

11536-595: The town hall and were very lucrative. Resellers and direct sellers increased the number of sellers, thus increasing competition, to the benefit of consumers. Direct sellers, who brought produce from the surrounding countryside, sold their wares through the central market place and priced their goods at considerably lower rates than cheesemongers. From 1300 through to the 1800s a large number of European chartered and merchant companies were established to exploit international trading opportunities. The Company of Merchant Adventurers of London , chartered in 1407, controlled most of

11648-417: The trading security or derivatives are not fully developed, investors find it infeasible or unprofitable to implement statistical arbitrage in local markets. In China, quantitative investment including statistical arbitrage is not the mainstream approach to investment. A set of market conditions restricts the trading behavior of funds and other financial institutions. The restriction on short selling as well as

11760-524: The trappings of culture. The Phoenicians' extensive trade networks necessitated considerable book-keeping and correspondence. In around 1500 BCE, the Phoenicians developed a script which was much easier to learn than the pictographic systems used in ancient Egypt and Mesopotamia. Phoenician traders and merchants were largely responsible for spreading their alphabet around the region. Phoenician inscriptions have been found in archaeological sites at

11872-453: The use of automated trading systems. Historically, StatArb evolved out of the simpler pairs trade strategy, in which stocks are put into pairs by fundamental or market-based similarities. When one stock in a pair outperforms the other, the under performing stock is bought long and the outperforming stock is sold short with the expectation that under performing stock will climb towards its outperforming partner. Mathematically speaking,

11984-519: The value of the portfolio is never negative, and guaranteed to be positive at least once over its lifetime. Negative, or anti-, arbitrage is similarly defined as and occurs naturally in arbitrage relations as the seller view as opposed to the buyer view. Arbitrage has the effect of causing prices in different markets to converge. As a result of arbitrage, the currency exchange rates and the prices of securities and other financial assets in different markets tend to converge. The speed at which they do so

12096-622: The years following the opening up of Asia and the discovery of the New World, goods were imported from very long distances: calico cloth from India, porcelain, silk and tea from China, spices from India and South-East Asia and tobacco, sugar, rum and coffee from the New World. In Mesoamerica, a tiered system of traders developed independently. The local markets, where people purchased their daily needs were known as tianguis while pochteca referred to long-distance, professional merchants traders who obtained rare goods and luxury items desired by

12208-543: Was a prolific pamphleteer. His many publications include titles devoted to trade, including: Trade of Britain Stated (1707); Trade of Scotland with France (1713); The Trade to India Critically and Calmly Considered (1720) and A Plan of the English Commerce (1731); all pamphlets that became highly popular with contemporary merchants and business houses. Armenians operated as a prominent trade nation during

12320-420: Was able to generate higher overall profits. Similarly, one of Wedgewood's contemporaries, Matthew Boulton, pioneered early mass-production techniques and product differentiation at his Soho Manufactory in the 1760s. He also practiced planned obsolescence and understood the importance of " celebrity marketing " – that is supplying the nobility, often at prices below cost – and of obtaining royal patronage , for

12432-427: Was common. In this form of speculation , one trades a security that is clearly undervalued or overvalued, when it is seen that the wrong valuation is about to be corrected. The standard example is the stock of a company, undervalued in the stock market, which is about to be the object of a takeover bid; the price of the takeover will more truly reflect the value of the company, giving a large profit to those who bought at

12544-494: Was known to have used marketing techniques such as direct mail , travelling salesmen and catalogues in the eighteenth century. Wedgewood also carried out serious investigations into the fixed and variable costs of production and recognised that increased production would lead to lower unit-costs. He also inferred that selling at lower prices would lead to higher demand and recognised the value of achieving scale economies in production. By cutting costs and lowering prices, Wedgewood

#16983